HKSI Licensing Examination Paper 1 (Regulation) — All Questions

Which contact is most likely to fall within an exception to the SFO restriction on unsolicited calls?

• a.A mass automated call to every telephone number in a purchased marketing list, offering a brand-new speculative product
• b.A call to a stranger at 6 a.m.
• c.A cold call to a randomly selected member of the public
• d.A call to an existing client, during ordinary business hours, about a product of a kind the client already deals in✓

The SFO restriction on unsolicited calls (s.174) contains exceptions, including calls made in permitted circumstances to a person with whom the caller has an existing client relationship concerning products of a kind already dealt in.

A dealer mistakenly buys the wrong stock for a client. Proper conduct requires the firm to:

• a.Correct the error so the client is not disadvantaged, using a designated error account and keeping proper records✓
• b.Charge the client for the mistake
• c.Leave the wrong stock in the client's account
• d.Keep the position if it happens to become profitable, but pass any loss on the erroneous trade to the client's account

Dealing errors must be corrected so the client is not disadvantaged, processed through a designated error account, and recorded and reviewed by management. The firm must not shift its own error losses onto the client or keep the upside.

If an intermediary recommends securities in which it or a connected person has a material interest, it must:

• a.Disclose that interest to the client✓
• b.Recommend the securities only to clients who have expressly waived, in advance, their right to be told about any conflicts of interest
• c.Cancel the recommendation without explanation
• d.Say nothing, to avoid influencing the client

General Principle 6 (Conflicts of interest) requires disclosure of material interests. Where the firm or a connected person has a material interest in a recommended transaction, that interest must be disclosed and the client's interests given priority.

Marketing and advertising materials issued by an intermediary must be:

• a.Accurate, fair, clear and not misleading, presenting risks as well as benefits✓
• b.Focused only on potential gains
• c.Approved by HKEX before issue in every case
• d.Designed to emphasise headline returns while omitting any reference to risks, provided a disclaimer appears somewhere in small print

The Code of Conduct requires marketing materials to be accurate and not misleading, giving a balanced presentation that includes risks as well as potential benefits, so clients are not given a false impression.

Where a client proposes to borrow in order to invest, increasing the risk, the intermediary should:

• a.Guarantee the leveraged returns
• b.Encourage maximum leverage
• c.Ignore the borrowing in the suitability analysis
• d.Factor the additional risk of leverage into the suitability assessment and ensure the client understands it✓

Leverage magnifies both gains and losses. Under para 5.2, the additional risk from borrowing to invest must be reflected in the suitability assessment, and the client must understand the heightened risk before proceeding.

Under the Code of Conduct, the responsible officers and senior management of a firm are expected to:

• a.Concern themselves only with profitability, leaving all questions of client protection and market conduct entirely to the external auditor
• b.Establish and maintain proper standards of conduct and adherence to procedures by all staff✓
• c.Delegate all conduct responsibility to junior staff and bear none themselves
• d.Focus solely on revenue targets

General Principle 9 (Responsibility of senior management) makes senior management and responsible officers responsible for establishing and maintaining appropriate standards of conduct and for ensuring staff adhere to proper procedures.

A client instructs the firm to pay sale proceeds to a third party's bank account. The firm should:

• a.Transfer the funds to any account named in an unsigned email, since the client's verbal say-so is always sufficient authority for third-party payments
• b.Refuse all third-party payments in every case
• c.Pay without verifying the instruction
• d.Obtain proper written authority and be alert to money-laundering and fraud red flags before acting✓

Third-party payment instructions require proper verified authority and heightened alertness to fraud and money-laundering red flags, consistent with the Code of Conduct and AML requirements, before the firm acts on them.

A professional-investor classification relied on to disapply certain protections should be:

• a.Reviewed periodically to confirm the client still meets the qualifying criteria✓
• b.Extended automatically to every family member and related company of the qualifying client without any separate assessment of each of them
• c.Treated as permanent and never revisited
• d.Based only on the client's nationality

A professional-investor status that removes protections must be justified on an ongoing basis; the firm should review periodically that the client continues to meet the qualifying criteria and must assess each entity or person separately.

If a client's dealing instruction is ambiguous, the representative should:

• a.Clarify the instruction with the client before executing✓
• b.Execute whichever interpretation earns the most commission
• c.Execute both possible interpretations at once and let the client keep whichever of the two resulting positions later turns out to be profitable
• d.Guess what the client meant and proceed

Acting with due care under General Principle 2 requires clarifying an ambiguous instruction with the client before execution, rather than guessing, so the transaction reflects the client's actual intention.

Where the firm's commercial interest conflicts with a client's interest and the conflict cannot be avoided, the Code of Conduct requires the firm to:

• a.Terminate the client relationship immediately
• b.Split the difference equally between itself and the client
• c.Ensure the client is treated fairly, disclosing the conflict and giving priority to the client's interests✓
• d.Prefer its own interest

General Principle 6 (Conflicts of interest) requires conflicts to be avoided where possible and, where unavoidable, managed by fair treatment, disclosure and giving priority to the client's interests.